The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, in the case George Borg vs Primrose Poultry Products Ltd and Robert Borg, Joseph Galea and Michael Vella, all as directors of Primrose Poultry Products Ltd, on January 16, 2012, held, among other things, that a shareholder may bring an unfair prejudice action under article 402 of the Companies Act against directors who act improperly and cause him prejudice. In this case, loans were granted to another company in which the defendant directors had a personal interest, to the prejudice of Primrose.

The facts in this case were as follows:

Although the two companies had assisted each other financially in the past, this did not imply that Primrose had to financially assist PGT at all costs, especially when PGT was not in a position to repay the debt

The three defendant directors of Primrose Poultry Products Ltd were allegedly using Primrose’s assets to finance the activities of PGT Co. Ltd, a company in financial difficulties.

The majority of the directors of Primrose had a personal interest in ensuring that PGT continued trading. Robert Borg held the majority shareholding in PGT while Joseph Galea, Michael Vella and Robert Borg, as well as Robert Borg’s siblings, were employed by PGT.

George Borg was a minority shareholder and a director of Primrose. He claimed that the actions of the three other directors of Primrose were unfairly prejudicial to himself, to the other minority shareholders and to the company under article 402 of the Companies Act. He therefore asked the court to prohibit Primrose’s directors from using the company’s assets to pay any obligations of any third party, from further encumbering Primrose in any way and from recruiting any new employees.

He also asked the court to order Primrose’s directors not to carry out any commercial activity which was not contemplated in the objects clause of the company’s memorandum and articles of association; not to alienate, transfer or in any way dispose of the immovable assets of Primrose; not to create any encumbrances, privileges, hypothecs or any personal or real right over any movable or immovable assets of Primrose; and not to import or in any other manner acquire merchandise or food products in Primrose’s name.

Furthermore, George Borg asked the court to give any other order it considered fit and appropriate; to ensure that Primrose would be paid everything it was owed by the directors, or to neutralise the unfair prejudice to the minority shareholder; and to order that George Borg would have full and free access to the accounting records, correspondence and offices of Primrose.

The court was also asked to order that Primrose be wound up and to give any other remedy contemplated under article 402(3) of the Companies Act which it felt to be appropriate.

George Borg informed the court that Primrose had ceased to operate in the last three years and there was no reason for the company to remain in existence except to collect the debts owed to it, satisfy its creditors and distribute any remaining proceeds among the shareholders.

PGT was clearly not in a position to repay the debts owed to Primrose. If the latter continued financing PGT’s activities, Primrose would end up insolvent and his right as a shareholder to receive any proceeds remaining after Primrose’s creditors were satisfied would be diminished.

He maintained that the other three directors were acting illegally and allegedly did not have voting rights. Further, the quorum requirement was not being satisfied.

In their reply, Primrose’s other three directors contested George Borg’s claims of unfair prejudice. They submitted that his claim was incorrectly motivated. Allegedly he had filed this action to get back at Robert Borg for refusing to buy his shares. Contrary to what George Borg maintained, Robert Borg had voting rights and the quorum requirement was satisfied.

The defendant directors said George Borg’s action was premature. He had never availed himself of the procedure set out in the Companies Act to remove a director and he had never called a general meeting in order to remove the directors. Up to the moment when the present action was instituted, George Borg had always approved of the activities that were being carried out by Primrose.

They further claimed the company was managed according to the company’s objects as set out in the memorandum of association, and it was important for Primrose to have close relations with PGT.

On January 16, 2012, the First Hall of the Civil Court gave its judgement, accepting George Borg’s claims under article 402 of the Companies Act. The court declared that George Borg’s action was well founded under article 402(1), and it was just and equitable for the court to apply article 402(3)(g) and order the winding up of Primrose and its consequent liquidation.

The court also appointed a liquidator under article 227 of the Companies Act to verify the assets and debts of Primrose, to take under his custody and control all Primrose’s property and obligations, to exercise all the powers available to him under article 328 of the Companies Act, to take the necessary measures to safeguard Primrose’s assets, and to present his report within three months from the date of this judgement.

Citing case law extensively, the court said it had reached its decision after considering that it was essential to prove that the act or omission was or was likely to be oppressive, discriminatory or unfairly prejudicial. But it was not necessary to show that the act was unfairly prejudicial, discriminatory or oppressive specifically against the person bringing the action. It was sufficient that the act was unfairly prejudicial, discriminatory or oppressive against any other specific shareholder or even against the members of the company, in general.

The court had also considered the nature of a derivative action. Reference was made to Company Law by Charlesworth and Morse and to Andrew Muscat, who, in Principles of Maltese Company Law, stated that the derivative action could be brought by a shareholder when the wrong was done to the company itself and the company was controlled by the wrongdoers and, therefore, could not bring the action itself. In fact, the benefit of the derivative action would not accrue to the shareholder bringing the action but to the company.

The court confirmed that Primrose was no longer in a position to carry out its main activities relating to the poultry industry. It also noted that no action had ever been taken by the shareholders to merge Primrose and PGT.

Although the two companies had assisted each other financially in the past, this did not imply that Primrose had to financially assist PGT at all costs, especially when PGT was not in a position to repay the debt. If Primrose continued advancing money to PGT, Primrose would end up disposing of all its assets, leaving no assets for the satisfaction of its creditors.

The conflicting interests of Primrose’s other three directors were also noted. On the one hand, the directors wished Primrose to continue operating in order to allow it to finance PGT’s activities because their family members were employed with or were shareholders of PGT. On the other hand, the shareholders of Primrose had an interest to liquidate the company.

The action complained of was clearly oppressive, discriminatory and unfairly prejudicial because it was in the interests of George Borg, the other minority shareholders and the company itself for Primrose to be liquidated.

It was clearly against the interests of the company and of its shareholders for the company to continue in existence and to be divested of its assets in order to favour the interests of the employees and members of PGT Ltd.

For these reasons the court rejected the arguments of Primrose’s other three directors and declared their conduct to be unfairly prejudicial under article 402(1) of Cap. 386.

Dr Grech Orr is a partnerat Ganado & Associates.